Mag 7 Starts Burning Cash (for Real)

**Tyler Crowe** (0:02)
Mag 7 earnings are getting off to a rough start. Today on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Lou Whiteman and Jon Quast, doing a little bit of analyst shuffleboard this week with people filling in for a little bit of vacation. So we're going to get into earnings because this week is one of the busiest earnings weeks that we have. Tons of companies are reporting. But we want to dive into some of the companies we consider in the hidden gems universe. Some of the things we're looking forward to this earnings season. But we wanted to start with the big moves on the day, which were obviously Tesla and Alphabet, two of the Mag 7 that are getting this earnings started. And it didn't look great. Both reported after the close yesterday. And both stocks, Google and Tesla, are down 7% and 13% respectively as we tape. And the largest reason, at least as far as I could tell, is that both companies are now solidly in cash burn mode with their investments. So this was a fascinating tidbit. I think I saw it in the Financial Times before we got started, guys. For the first time since going public back in 2002, 2003, Alphabet posted its first quarter ever of negative free cash flow.
That sounds pretty egregious or very stark and something we've been talking about for a while. What did these numbers look like across the board?

**Lou Whiteman** (1:28)
So look, we've known this was coming forever, and the interesting thing to me is we're finally starting to care about it. Because Alphabet, yeah, the numbers were great on one side of the ledger. 82 percent revenue growth, the cloud backlog continues to go up double digits. But they are spending every bit of money that they bring in and more. Like you say, they actually went free cash flow negative. They actually boosted their CapEx spending.
We thought last quarter, it's like, well, I can't go any higher than this. Well, hold my beer, as they say, right? They are now expecting to spend 195 billion to 205 billion dollars in CapEx this year. That's a $15 billion boost from what they said previously. That's how you end up with negative free cash flow. This is a narrative story, Tyler, because from most of its history, as you said, they had a ton of money and they didn't know what to do with it all. That's why they had the other bets. Now, suddenly, this is looking like one of those boring old industrial businesses that I follow that for every dollar you make, you have to spend 98, 99 cents, even maybe a $1.
It should be temporary, but how long is temporary and how long does this drag out? These are the questions I think the market's asking today.

**Jon Quast** (2:46)
Yeah. I will point out too that there is a big difference between cash burn in Tesla and Alphabet's results. Really, Alphabet is falling in with the other hyperscalers in their cash burn. They're really spending that all on the AI compute and the infrastructure to go along with that. Tesla, on the other hand, moving cars is why they're burning cash. They're lowering those prices to get cars out the door. That's a very different scenario than what the other players are facing. And I think really you can make an argument.
Maybe there's disagreement in the argument, but I think you can make an argument that Alphabet is making a good move here.
You look at the Google Cloud segment, revenue up 82% year over year. Operating income in the Google Cloud segment up over 200% year over year. So there are real results here. There is real momentum with the AI investments. You can say that they're investing way more than what justifies the return that they're getting, and I understand that. But there is some sort of economic benefit that we can see, we can measure. Hopefully, it's a long tailwind. Whereas, TSLA, I think that there's more questions on the cash burn segment.

**Tyler Crowe** (4:00)
Yeah, to that point too, and Lou, you and I were mentioning it before the show, was that not only is TSLA getting into cash burn mode now, their capex spending that they said they were going to do this year, which is about $25 billion, you could say so far this year, they're actually a little behind schedule. I think they've only spent like $8 billion, $8.5 billion so far. So the expectation is that the cash ramp for them over the rest of the year and presumably over the next several years is going to ramp up significantly from here.